Risk Management Manual of Examination Policies - FDIC

INTERNATIONAL BANKING Section 11.1
merely for losses arising from fire, but also from piracy,
wreck, and most injuries sustained at sea.
Matched – A forward purchase is matched when it is
offset by a forward sale for the same date, or vice versa.
However, as a practical necessity, when setting limits for
unmatched positions, a bank may consider a contract
matched if the covering contract falls within the same week
or semi-monthly period.
Maturity Date – The settlement date or delivery date for a
forward contract.
Maturity Gap (Gap) – Mismatched asset and liability
maturities creating periods of uneven cash inflows and
outflows. A substantial inflow of a particular currency
over a prolonged period may result in excess idle funds for
which no investment or sale has been arranged. This could
mean a loss of income on the idle funds for that period
and/or of be amount by which the value of that currency is
expected to appreciate or depreciate. Conversely,
substantial outflows prior to the maturities of offsetting
assets may necessitate purchasing or borrowing the
required currency for that period (gap) at substantially
higher rates. Thus, the bank is exposed to the risk of rate
changes between the time the gap was created and the date
it is actually closed.
Mercosur – The Mercosur was created by Argentina,
Brazil, Paraguay and Uruguay in March 1991 with the
signing of the Treaty of Asuncion. It originally was set up
with the ambitious goal of creating a common
market/customs union between the participating countries
on the basis of various forms of economic cooperation that
had been taking place between Argentina and Brazil since
1986. The Treaty of Ouro Preto of 1994 added much to
the institutional structure of Mercosur and initiated a new
phase in the relationship between the countries, when they
decided to start to implement/realize a common market. A
transition phase was set to begin in 1995 and to last until
2006 with a view to constituting the common market. In
1996, association agreements were signed with Chile and
Bolivia establishing free trade areas with these countries on
the basis of a "4 + 1" formula. During this period,
Mercosur also created a common mechanism for political
consultations, which was formalized in 1998, in which the
four countries plus Bolivia and Chile all participate as full
members of the so-called "Political Mercosur."
Multi-currency Line – A line of credit giving the
borrower the option of using any readily available major
currency.
Multilateral Exchange Contract – An exchange contract
involving two foreign currencies against each other, for
example, a contract for U.S. dollars against French francs
made in London or a contract for U.S. dollars against
German marks made in New York. Also called an
arbitrage exchange contract.
Nationalization – A process where a nation’s central
government assumes ownership and operation of private
enterprises within its territory.
Net Accessible Interest Differential – The difference
between the interest rates that can actually be obtained on
two currencies. This difference is usually the basis of the
swap rate between the two currencies and, in most cases, is
derived from external interest rates rather than domestic
ones. These external rates or Euro-rates are free from
reserve requirements, which would increase the interest
rate, and from exchange controls, which would limit access
to the money.
Net Exchange Position – An imbalance between all the
assets and purchases of a currency, and all the liabilities
and sales of that currency.
Net Position – A bank has a position in a foreign currency
when its assets, including future contracts to sell, in that
currency are not equal. An excess of assets over liabilities
is called a net "long" position and liabilities in excess of
assets result in a net "short" position. A long net position
in a currency which is depreciating results in a loss
because, with each day, that position (asset) is convertible
into fewer units of local currency. A short position in a
currency which is appreciating represents a loss because,
with each day, satisfaction of that position (liability) costs
more units of local currency.
Netting Arrangement – Arrangement by two
counterparties to examine all contracts settling in the same
currency on the same day and to agree to exchange only
the net currency amounts. Also applies to the net market
values of several contracts.
Non-tariff Trade Barriers – Barriers other than tariffs
that tend to restrict trade. For example, setting higher
inspection standards for imports than for domestically
produced items, giving preference to domestic companies
in bidding on contracts, import substitution programs,
import licensing requirements, additional product labeling
requirements, export subsidizing, inadequate protection of
intellectual property rights, or limitations on services.
North American Free Trade Agreement (NAFTA) – A
free trade area consisting of Canada, Mexico, and the U.S.
The goal is to reduce trade barriers between the member
DSC Risk Management Manual of Examination Policies 11.1-43 International Banking (12-04)
Federal Deposit Insurance Corporation